Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Commonwealth Income & Growth Fund VIFinancial_Report.xls
EX-32.2 - CIGF6 EXHIBIT 32.2 6-30-13 - Commonwealth Income & Growth Fund VIex32_2.htm
EX-32.1 - CIGF6 EXHIBIT 32.1 6-30-13 - Commonwealth Income & Growth Fund VIex32_1.htm
EX-31.1 - CIGF6 EXHIBIT 31.1 6-30-13 - Commonwealth Income & Growth Fund VIex31_1.htm
EX-31.2 - CIGF6 EXHIBIT 31.2 6-30-13 - Commonwealth Income & Growth Fund VIex31_2.htm


 



 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013 or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 333-131736

COMMONWEALTH INCOME & GROWTH FUND VI
(Exact name of registrant as specified in its charter)

Pennsylvania
20-4115433
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)

Brandywine Bldg. One, Suite 200
2 Christy Drive
Chadds Ford, PA 19317
(Address, including zip code, of principal executive offices)

(484) 785-1480
(Registrant’s telephone number including area code)
 
Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (ii) has been subject to such filing requirements for the past 90 days: YES T NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).YES T NO ¨


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "accelerated filer, “large accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company T
(Do not check if a smaller reporting company.)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO T



1
 
 
 

 

 
 
 
FORM 10-Q
June 30, 2013

TABLE OF CONTENTS

PART I
Item 1.
Financial Statements
3
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
9
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
11
Item 4.
Controls and Procedures
11
PART II
Item 1.
Legal Proceedings
11
Item 1A.
Risk Factors
11
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
11
Item 3.
Defaults Upon Senior Securities
11
Item 4.
Mine Safety Disclosures
11
Item 5.
Other Information
11
Item 6.
Exhibits
11

2
 
 
 

 
 
 
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements


Commonwealth Income & Growth Fund VI
 
Condensed Balance Sheets
 
             
             
             
   
June 30,
   
December 31,
 
   
2013
   
2012
 
   
(unaudited)
       
             
ASSETS
           
Cash and cash equivalents
  $ 356,248     $ 860,982  
Lease income receivable, net of reserve of approximately $42,000 and $450,000
               
at June 30, 2013 and December 31, 2012, respectively
    248,958       482,788  
Accounts receivable, Commonwealth Capital Corp.
    672,171       820,520  
Other receivables
    3,167       6,695  
Prepaid expenses
    4,767       512  
      1,285,311       2,171,497  
                 
Net investment in finance leases
    -       54,335  
                 
Equipment, at cost
    19,786,145       22,669,723  
Accumulated depreciation
    (14,484,875 )     (15,620,436 )
      5,301,270       7,049,287  
                 
Equipment acquisition costs and deferred expenses, net of
               
accumulated amortization of  approximately $224,000 and $360,000 at June 30, 2013 and December 31, 2012, respectively
    143,120       203,491  
      143,120       203,491  
                 
Total Assets
  $ 6,729,701     $ 9,478,610  
                 
LIABILITIES AND PARTNERS' CAPITAL
               
                 
LIABILITIES
               
Accounts payable
  $ 84,618     $ 127,264  
Accounts payable, General Partner
    108,199       216,797  
Other accrued expenses
    13,775       49,703  
Unearned lease income
    171,721       280,591  
Notes payable
    181,900       294,508  
 
    560,213       968,863  
                 
PARTNERS' CAPITAL
               
General Partner
    1,000       1,000  
Limited Partners
    6,168,488       8,508,747  
Total Partners' Capital
    6,169,488       8,509,747  
                 
Total Liabilities and Partners' Capital
  $ 6,729,701     $ 9,478,610  
                 
                 
see accompanying notes to condensed financial statements


3
 
 
 

 



Commonwealth Income & Growth Fund VI
 
Condensed Statements of Operations
 
(unaudited)
 
                         
                         
                         
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Revenue
                       
Lease
  $ 1,001,450     $ 1,688,675     $ 2,340,537     $ 3,434,492  
Interest and other
    941       4,484       15,532       8,213  
Gain on sale of investment in finance leases
    728       -       728       -  
Gain on sale of equipment
    -       25,342       -       39,305  
Total revenue
    1,003,119       1,718,501       2,356,797       3,482,010  
                                 
Expenses
                               
Operating, excluding depreciation
    220,012       302,055       518,691       624,266  
Equipment management fee, General Partner
    50,279       84,988       117,692       172,832  
Interest
    2,514       6,730       5,634       14,388  
Depreciation
    964,351       1,309,245       2,060,205       2,644,699  
Amortization of equipment acquisition costs and deferred expenses
    37,236       64,361       80,141       139,113  
Loss on sale of equipment
    101,331       -       78,831       -  
Bad debt expense
    -       20,143       -       50,143  
Total expenses
    1,375,723       1,787,522       2,861,194       3,645,441  
                                 
Net loss
  $ (372,604 )   $ (69,021 )   $ (504,397 )   $ (163,431 )
                                 
Net loss allocated to Limited Partners
  $ (381,584 )   $ (78,044 )   $ (522,358 )   $ (182,495 )
                                 
Net loss per equivalent Limited Partnership unit
  $ (0.21 )   $ (0.04 )   $ (0.29 )   $ (0.10 )
 
                               
Weighted average number of equivalent
                               
     Limited Partnership units outstanding
                               
     during the period
    1,799,710       1,804,484       1,797,653       1,805,989  
                                 
                                 
see accompanying notes to condensed financial statements

4
 
 

 




 
Commonwealth Income & Growth Fund VI
 
Condensed Statement of Partner's Capital
 
For the six months ended June 30, 2013
 
(unaudited)
 
                               
   
General
   
Limited
                   
   
Partner
   
Partner
   
General
   
Limited
       
   
Units
   
Units
   
Partner
   
Partners
   
Total
 
Balance, January 1, 2013
    50       1,800,881     $ 1,000     $ 8,508,747     $ 8,509,747  
Net income (loss)
    -       -       17,961       (522,358 )     (504,397 )
Redemptions
    -       (4,774 )     -       (39,762 )     (39,762 )
Distributions
    -       -       (17,961 )     (1,778,139 )     (1,796,100 )
Balance, June 30, 2013
    50       1,796,107     $ 1,000     $ 6,168,488     $ 6,169,488  
                                         
                                         
see accompanying notes to condensed financial statements

5
 
 

 




Commonwealth Income & Growth Fund VI
 
Condensed Statements of Cash Flows
 
(unaudited)
 
             
             
   
Six months ended June 30,
 
   
2013
   
2012
 
             
Net cash provided by operating activities
  $ 1,803,001     $ 2,271,656  
                 
Cash flows from investing activities
               
Capital expenditures
    (501,450 )     (1,411,323 )
Payments received from finance leases
    -       55,355  
Equipment acquistion fees paid to General Partner
    (19,770 )     -  
Net proceeds from the sale of equipment
    49,347       330,780  
Net cash used in investing activities
    (471,873 )     (1,025,188 )
                 
Cash flows from financing activities
               
Redemptions
    (39,762 )     (44,103 )
Distributions to partners
    (1,796,100 )     (1,805,152 )
Net cash used in financing activities
    (1,835,862 )     (1,849,255 )
                 
Net decrease in cash and cash equivalents
    (504,734 )     (602,787 )
                 
Cash and cash equivalents at at beginning of the period
    860,982       1,575,177  
                 
Cash and cash equivalents at end of the period
  $ 356,248     $ 972,390  
                 
                 
                 
see accompanying notes to condensed financial statements

6
 
 

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

1. Business

Commonwealth Income & Growth Fund VI (the “Partnership”) is a limited partnership organized in the Commonwealth of Pennsylvania on January 6, 2006. The Partnership offered for sale up to 2,500,000 units of the limited partnership at the purchase price of $20 per unit (the “offering”). The Partnership reached the minimum amount in escrow and commenced operations on May 10, 2007. The offering terminated on March 6, 2009 with 1,810,311 units sold for a total of approximately $36,000,000 in limited partner contributions.

The Partnership uses the proceeds of the offering to acquire, own and lease various types of information technology equipment and other similar capital equipment, which will be leased primarily to U.S. corporations and institutions. Commonwealth Capital Corp. (“CCC”), on behalf of the Partnership and other affiliated partnerships, acquires equipment subject to associated debt obligations and lease agreements and allocates a participation in the cost, debt and lease revenue to the various partnerships that it manages based on certain risk factors.

The Partnership’s General Partner is Commonwealth Income & Growth Fund, Inc. (the “General Partner”), a Pennsylvania corporation which is an indirect wholly owned subsidiary of CCC. CCC is a member of the Investment Program Association (IPA), Financial Planning Association (FPA), and the Equipment Leasing and Finance Association (ELFA). Approximately ten years after the commencement of operations, the Partnership intends to sell or otherwise dispose of all of its equipment, make final distributions to partners, and to dissolve. Unless sooner terminated or extended pursuant to the terms of its Limited Partnership Agreement, the Partnership will continue until December 31, 2018.

2. Summary of Significant Accounting Policies

Basis of Presentation

The financial information presented as of any date other than December 31, 2012 has been prepared from the books and records without audit. Financial information as of December 31, 2012 has been derived from the audited financial statements of the Partnership, but does not include all disclosures required by generally accepted accounting principles to be included in audited financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information for the periods indicated, have been included. For further information regarding the Partnership’s accounting policies, refer to the financial statements and related notes included in the Partnership’s annual report on Form 10-K for the year ended December 31, 2012. Operating results for the six months ended June 30, 2013 are not necessarily indicative of financial results that may be expected for the full year ended December 31, 2013.

Disclosure of Fair Value of Financial Instruments

Estimated fair value was determined by management using available market information and appropriate valuation methodologies. However, judgment was necessary to interpret market data and develop estimated fair value. Cash and cash equivalents, receivables, accounts payable and accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair values as of June 30, 2013 and December 31, 2012 due to the short term nature of these financial instruments.

The Partnership’s long-term debt consists of notes payable, which are secured by specific equipment and are nonrecourse liabilities of the Partnership. The estimated fair value of this debt at June 30, 2013 and December 31, 2012 approximates the carrying value of these instruments, due to the interest rates on the debt approximating current market interest rates. The Partnership classifies the fair value of its notes payable within Level 2 of the valuation hierarchy based on the observable inputs used to estimate fair value.

Cash and cash equivalents

We consider cash equivalents to be highly liquid investments with an original maturity of 90 days or less.

At June 30, 2013, cash was held in three accounts maintained at one financial institution with an aggregate balance of approximately $359,000. Bank accounts are federally insured up to $250,000 by the FDIC. At June 30, 2013, the total cash balance was as follows:

At June 30, 2013
 
Balance
 
Total bank balance
 
$
359,000
 
FDIC insured
   
(250,000
)
Uninsured amount
 
$
109,000
 

The Partnership believes it mitigates the risk of holding uninsured deposits by depositing funds with more than one institution and by only depositing funds with major financial institutions. The Partnership deposits its funds with two institutions that are Moody's Aaa-and Aa3 Rated. The Partnership has not experienced any losses in such accounts, and believes it is not exposed to any significant credit risk. The amounts in such accounts will fluctuate throughout 2013 due to many factors, including cash receipts, equipment acquisitions, interest rates and distributions to investors.

Recent Accounting Pronouncements

In October 2012, the FASB issued ASU No. 2012-04 (“ASU Update 2012-04”), Technical Corrections and Improvements. The amendments in this Update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments in this ASU that will not have transition guidance are effective upon issuance of the ASU, which is the fourth quarter of 2012. The amendments that are subject to transition guidance will be effective for fiscal periods beginning after December 15, 2012. The Partnership adopted this ASU during the first quarter of 2013 and determined it had no material impact on its financial statements.

In April 2013, the FASB issued ASU No. 2013-07 (“ASU Updated 2013-07”), Presentation of Financial Statements(Topic 205): Liquidation Basis of Accounting. This ASU provides guidance on the application of the liquidation basis of accounting as provided by U.S. GAAP. The guidance will improve the consistency of financial reporting for liquidating entities. The guidance in this ASU is effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. The Partnership anticipates the ASU will not have a material impact on its financial statements once adopted during the liquidation stage of its life cycle.

3. Information Technology, Medical Technology, Telecommunications Technology, Inventory Management and Other Business-Essential Capital Equipment (“Equipment”)

The Partnership is the lessor of equipment under leases with periods that generally will range from 12 to 48 months. In general, associated costs such as repairs and maintenance, insurance and property taxes are paid by the lessee.

Remarketing fees are paid to the leasing companies from which the Partnership purchases leases. These are fees that are earned by the leasing companies when the initial terms of the lease have been met. The General Partner believes that this strategy adds value since it entices the leasing company to remain actively involved with the lessee and encourages potential extensions, remarketing or sale of equipment. This strategy is designed to minimize any conflicts the leasing company may have with a new lessee and may assist in maximizing overall portfolio performance. The remarketing fee is tied into lease performance thresholds and is a factor in the negotiation of the fee. Remarketing fees incurred in connection with lease extensions are accounted for as operating costs. Remarketing fees incurred in connection with the sale of equipment are included in the gain or loss calculations. For the six months ended June 30, 2013 and 2012, the Partnership incurred remarketing fees of approximately $30,000 and $73,000, respectively. For the six months ended June 30, 2013 and 2012, the Partnership paid approximately $61,000 and $58,000 in such fees, respectively.

CCC, on behalf of the Partnership and on behalf of other affiliated partnerships, acquires equipment subject to associated debt obligations and lease agreements and allocates a participation in the cost, debt and lease revenue to the various partnerships based on certain risk factors.

The Partnership’s share of the cost of the equipment in which it participates with other partnerships at June 30, 2013 was approximately $8,174,000 and is included in the Partnership’s equipment on its balance sheet. The total cost of the equipment shared by the Partnership with other partnerships at June 30, 2013 was approximately $17,623,000. The Partnership’s share of the outstanding debt associated with this equipment at June 30, 2013 was approximately $182,000 and is included in the Partnership’s notes payable on its balance sheet. The total outstanding debt related to the equipment shared by the Partnership at June 30, 2013 was approximately $364,000.

The Partnership’s share of the cost of the equipment in which it participates with other partnerships at December 31, 2012 was approximately $7,951,000 and is included in the Partnership’s equipment on its balance sheet. The total cost of the equipment shared by the Partnership with other partnerships at December 31, 2012 was approximately $22,501,000. The Partnership’s share of the outstanding debt associated with this equipment at December 31, 2012 was approximately $295,000 and is included in the Partnership’s notes payable on its balance sheet. The total outstanding debt related to the equipment shared by the Partnership at December 31, 2012 was approximately $610,000.

As the Partnership and the other programs managed by the General Partner increase their overall portfolio size, opportunities for shared participation are expected to continue. Sharing in the acquisition of a lease portfolio gives the fund an opportunity to acquire additional assets and revenue streams, while allowing the fund to remain diversified and reducing its overall risk with respect to one portfolio. Thus, total shared equipment and related debt should continue to trend higher for the remainder of 2013 as the Partnership builds its portfolio.

The following is a schedule of future minimum rentals on non-cancellable operating leases at June 30, 2013:

       
Six Months ended December 31, 2013
 
$
1,598,000
 
Year ended December 31, 2014
   
1,736,000
 
Year ended December 31, 2015
   
564,000
 
Year ended December 31, 2016
   
34,000
 
   
$
3,932,000
 

During June 2013, CCC, on behalf of the Partnership, negotiated a settlement with a significant lessee related to the buy-out of several operating and finance leases. The Partnership received consideration of approximately $386,000 as a result of the settlement. This consideration is recorded as a receivable from CCC in the Partnership’s condensed balance sheet at June 30, 2013. The consideration was paid in full by CCC to the Partnership in August 2013. Through the settlement, the Partnership reduced its lease income receivable by approximately $269,000 during the three months ended June 30, 2013.  The consideration for the buyout of equipment under operating leases was approximately $60,000 which resulted in a net loss of equipment that was subject to operating leases of approximately $116,000 for the three months ended June 30, 2013. As consideration for the buyout of its finance leases, the Partnership applied payments from the lessee of approximately $57,000 which resulted in a decrease in the net investment in financing receivables of approximately $56,000 and recorded a related gain of approximately $1,000 during the three months ended June 30, 2013.
 
7
 
 
 

 

4. Related Party Transactions

Receivables/Payables

As of June 30, 2013, the Partnership’s related party receivables and payables are short term, unsecured, and non-interest bearing.

Six months ended June 30,
 
2013
   
2012
 
             
Reimbursable expenses
           
Reimbursable expenses, which are charged to the Partnership by CCC in connection with the administration and operation of the Partnership, are allocated to the Partnership based upon several factors including, but not limited to, the number of investors, compliance issues, and the number of existing leases.
 
$
471,000
   
$
526,000
 
                 
Equipment acquisition fee
               
The General Partner earned an equipment acquisition fee of 4% of the purchase price of each item of equipment purchased as compensation for the negotiation of the acquisition of the equipment and lease thereof or sale under a conditional sales contract.
 
$
20,000
   
$
56,000
 

Equipment management fee
           
The General Partner is entitled to be paid a monthly fee equal to the lesser of (i) the fees which would be charged by an independent third party for similar services for similar equipment or (ii) the sum of (a) two percent of (1) the gross lease revenues attributable to equipment which is subject to full payout net leases which contain net lease provisions plus (2) the purchase price paid on conditional sales contracts as received by the Partnership and (b) 5% of the gross lease revenues attributable to equipment which is subject to operating and capital leases.
 
$
118,000
   
$
173,000
 

Debt placement fee
           
As compensation for arranging term debt to finance our acquisition of equipment, we will pay the General Partner a fee equal to one percent of such indebtedness; provided, however, that such fee shall be reduced to the extent we incur such fees to third parties unaffiliated with the General Partner of the lender with respect to such indebtedness. No such fee will be paid with respect to borrowings from the General Partner or its affiliates. We intend to initially acquire leases on an all cash basis with the proceeds of this offering, but may borrow funds after the offering proceeds have been invested. The amount we borrow, and therefore the amount of the fee, will depend upon interest rates at the time of a loan, and the amount of leverage we determine is appropriate at the time. We do not intend to use more than 30% leverage overall in the portfolio. Fees will increase as the amount of leverage we use increases, and as turnover in the portfolio increases and additional equipment is purchased using leverage.
 
$
-
   
$
-
 
 
Equipment liquidation fee
           
With respect to each item of equipment sold by the General Partner (other than in connection with a conditional sales contract), a fee equal to the lesser of (i) 50% of the competitive equipment sale commission or (ii) three percent of the sales price for such equipment is payable to the General Partner. The payment of such fees is subordinated to the receipt by the limited partners of (i) the return of their net capital contributions and 10% per annum cumulative return, compounded daily, on adjusted capital contributions and (ii) the net disposition proceeds from such sale in accordance with the Partnership Agreement. Such fee will be reduced to the extent any liquidation or resale fees are paid to unaffiliated parties. During the six months ended June 30, 2013 and 2012, the General Partner earned but waived approximately $2,000 and $0 of equipment liquidation fees, respectively.
 
$
2,000
   
$
10,000
 

5. Notes Payable

Notes payable consisted of the following approximate amounts:

   
June 30, 2013
   
December 31, 2012
 
Installment notes payable to banks; interest rate of 7.50%, due in monthly installments of $10,665, including interest with final payment in April 2013
 
$
-
   
$
42,000
 
                 
Installment note payable to banks; interest rate of 5.25%, due in monthly installments of $7,441, including interest, with final payment in July 2014
   
94,000
     
136,000
 
                 
Installment note payable to banks; interest rate of 4.23%, due in quarterly installments of $10,311 including interest, with final payment in September 2015
   
88,000
     
117,000
 
   
$
182,000
   
$
295,000
 

The notes are secured by specific equipment with a carrying value of approximately $273,000 as of June 30, 2013 and are nonrecourse liabilities of the Partnership. As such, the notes do not contain any financial debt covenants with which we must comply on either an annual or quarterly basis. Aggregate maturities of notes payable for each of the periods subsequent to June 30, 2013 are as follows:

   
Amount
 
Six months ending December 31, 2013
 
$
62,000
 
Year ended December 31, 2014
   
90,000
 
Year ended December 31, 2015
   
30,000
 
   
$
182,000
 

6. Supplemental Cash Flow Information

Other noncash activities included in the determination of net loss are as follows:

Six months ended June 30,
 
2013
   
2012
 
Lease revenue net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank
 
$
113,000
   
$
201,000
 

No interest or principal on notes payable was paid by the Partnership because direct payment was made by lessee to the bank in lieu of collection of lease income and payment of interest and principal by the Partnership.

Noncash investing and financing activities include the following:

Six months ended June 30,
 
2013
   
2012
 
Equipment acquisition fees earned by General Partner upon purchase of equipment from prepaid acquisition fees
 
$
-
   
$
56,000
 
Consideration from CCC related to the sale of investments in finance receivables
 
$
57,000
   
$
-
 
Consideration from CCC related to the sale of equipment under operating leases
 
$
60,000
   
$
-
 

During the six months ended June 30, 2013 and 2012, the Partnership wrote-off fully amortized acquisition and finance fees of approximately $216,000 and $389,000, respectively.

During the six months ended June 30, 2013 and 2012, the Partnership wrote-off fully reserved lease income receivable of approximately $408,000 and $0, respectively.
 
8
 
 
 

 

7. Commitments and Contingencies

Allied Health Care Services

As previously disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2012, management had fully impaired all equipment and reserved for all accounts receivable related to the lease to Allied Health Care Services, Inc. (“Allied”), due to the bankruptcy of Allied and the criminal conviction of its founder for fraud. During 2013, the fully reserved accounts receivable was written off. There have been no material changes in the status of Allied’s bankruptcy or in the likelihood of recovering available assets since the date of the Partnership’s annual report. The deadline for the bankruptcy trustee to pursue adversary claims against certain creditors has expired, including extensions. The bankruptcy trustee cannot seek to claim the Partnership's payments received from Allied, therefore the Partnership has no exposure to such potential claims. CCC continues to pursue all of our rights against both Allied and Mr. Schwartz to recover any available assets to the greatest extent possible.

Regulatory Activities

In August 2012 Commonwealth Capital Securities Corp (“CCSC”) and Commonwealth Capital Corp., the parent of CCSC and the General Partner, received communication from the staff of the U.S. Securities and Exchange Commission with respect to the interpretation and application of control person with regards to the limits on reimbursement of certain expenses. The staff had also indicated on their communication that they are not suggesting any egregious intent or violation. As a result of ongoing correspondence and conversation, CCC volunteered to and provided clarifying changes that have been made in disclosures in ongoing registration documents used by funds. While management believes that resolution of these issues with this agency will not result in any adverse financial impact on the Funds, we are involved in discussions with staff members to finalize resolution, but no assurance can be provided until resolution comes to conclusion. On May 3, 2013, the FINRA Department of Enforcement filed a complaint naming CCSC and the owner of the firm, Kimberly Springsteen-Abbott, as respondents. The complaint alleges that Ms. Springsteen-Abbott approved misallocation of certain expenses to the funds. Management believes that the expenses at issue include amounts that were proper and were properly allocated to funds, and expenses that had been allocated in error but were previously adjusted and repaid to the affected funds when they were identified. CCSC and Ms. Springsteen-Abbott deny the allegations and intend to vigorously defend the proceeding. Since the FINRA exam, CCC has instituted additional procedures to avoid any such errors in the future. Management believes that resolution of these issues will not result in any adverse financial impact on the Funds, but no assurance can be provided until resolution comes to conclusion.

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

This section, as well as other portions of this document, includes certain forward-looking statements about our business and our prospects, tax treatment of certain transactions and accounting matters, sales of securities, expenses, cash flows, distributions, investments and operating and capital requirements. Such forward-looking statements include, but are not limited to: acquisition policies of our general partner; the nature of present and future leases; provisions for uncollectible accounts; the strength and sustainability of the U.S. economy; the continued difficulties in the credit markets and their impact on the economy in general; and the level of future cash flow, debt levels, revenues, operating expenses, amortization and depreciation expenses. You can identify those statements by the use of words such as “could,” “should,” “would,” “may,” “will,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “continue” and “contemplate,” as well as similar words and expressions.

Actual results may differ materially from those in any forward-looking statements because any such statements involve risks and uncertainties and are subject to change based upon various important factors, including, but not limited to, nationwide economic, financial, political and regulatory conditions; the health of debt and equity markets, including interest rates and credit quality; the level and nature of spending in the information, medical and telecommunications technologies markets; and the effect of competitive financing alternatives and lease pricing.

Readers are also directed to other risks and uncertainties discussed in other documents we file with the SEC, including, without limitation, those discussed in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the SEC. We undertake no obligation to update or revise any forward-looking information, whether as a result of new information, future developments or otherwise.

INDUSTRY OVERVIEW

The Equipment Lease Finance Association (“ELFA”) Monthly Leasing and Finance Index which reports economic activity for the $725 billion equipment finance sector, showed overall new business volume for the 2nd quarter increased 10% relative to the same period of 2012.  Credit quality continued to improve as the rate of receivables aged in excess of 30 days decreased to below 1.4% from the same period last year. Additionally, charge-offs remain at an all-time low of 0.3%.  More than 50% of ELFA reporting members reported submitting more transactions for approval during the month of June.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that our critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

See Note 2 to our condensed financial statements included herein for a discussion related to recent accounting pronouncements.

LEASE INCOME RECEIVABLE

Lease income receivable includes current lease income receivable net of allowances for uncollectible amounts, if any. The Partnership monitors lease income receivable to ensure timely and accurate payment by lessees. The Partnership’s Lease Relations department is responsible for monitoring lease income receivable and, as necessary, resolving outstanding invoices.

The Partnership reviews a customer’s credit history before extending credit. When the analysis indicates that the probability of full collection is unlikely, the Partnership may establish an allowance for uncollectible lease income receivable based upon the credit risk of specific customers, historical trends and other information. The Partnership writes off its lease income receivable when it determines that it is uncollectible and all economically sensible means of recovery have been exhausted.

REVENUE RECOGNITION

Through June 30, 2013, the Partnership’s lease portfolio consisted solely of operating leases. For operating leases, lease revenue is recognized on a straight-line basis in accordance with the terms of the lease agreement.

Upon the end of the lease term, if the lessee has not met the return conditions as set out in the lease, the Partnership is entitled in certain cases to additional compensation from the lessee. The Partnership’s accounting policy for recording such payments is to treat them as revenue.

Gain or losses from sales of leased and off lease equipment are recorded on a net basis in the Fund’s condensed Statement of Operations.

LONG-LIVED ASSETS

Depreciation on technology and inventory management equipment for financial statement purposes is based on the straight-line method estimated generally over useful lives of two to four years. Once an asset comes off lease or is released, the Partnership reassesses the useful life of an asset.

The Partnership evaluates its long-lived assets when events or circumstances indicate that the value of the asset may not be recoverable. The Partnership determines whether impairment exists by estimating the undiscounted cash flows to be generated by each asset. If the estimated undiscounted cash flows are less than the carrying value of the asset then impairment exists. The amount of the impairment is determined based on the difference between the carrying value and the fair value. Fair value is determined based on estimated discounted cash flows to be generated by the asset.

Residual values are determined by management and are calculated using information from both internal and external sources, as well as other economic indicators.
 
9
 
 
 

 

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Cash

Our primary sources of cash for the six months ended June 30, 2013 were cash provided by operating activities of approximately $1,803,000 and net proceeds from the sale of equipment of approximately $49,000, compared to the six months ended June 30, 2012 where our primary sources of cash were provided by operating activities of approximately $2,272,000, net proceeds from the sale of equipment of approximately $331,000 and from payments due on finance leases of approximately $55,000. Our primary uses of cash for the six months ended June 30, 2013 were for the purchase of new equipment of approximately $501,000, distributions to partners of approximately $1,796,000, redemptions of approximately $40,000 and equipment acquisition fees paid to the General Partner of approximately $20,000. For the six months ended June 30, 2012, capital expenditures were approximately $1,411,000, distributions to partners were approximately $1,805,000 and redemptions of were approximately $44,000.

Cash was provided by operating activities for the six months ended June 30, 2013 of approximately $1,803,000, which includes a net loss of approximately $504,000 and depreciation and amortization expenses of approximately $2,140,000. Other noncash activities included in the determination of net loss include direct payments to banks by lessees of approximately $113,000. For the six months ended June 30, 2012, cash was provided by operating activities of approximately $2,272,000, which includes a net loss of approximately $163,000 and depreciation and amortization expenses of approximately $2,784,000. Other noncash activities included in the determination of net loss include direct payments to banks by lessees of approximately $201,000 and bad debt expense of approximately $50,000.

As we continue to increase the size of our equipment portfolio in this phase of the operating cycle, operating expenses may increase, which reflects the administrative costs of servicing the portfolio, but because of our investment strategy of leasing equipment primarily through triple-net leases, we avoid operating expenses related to equipment maintenance or taxes.

CCC, on our behalf and on behalf of other affiliated partnerships, acquires equipment subject to associated debt obligations and lease revenue and allocates a participation in the cost, debt and lease revenue to the various partnerships based on certain risk factors.
Capital expenditures and distributions are expected to continue to increase overall during the remainder of 2013 as management focuses on additional equipment acquisitions and funding limited partner distributions. We intend to invest approximately $2,400,000 in additional equipment during the remainder of 2013, primarily through debt financing.

We consider cash equivalents to be highly liquid investments with an original maturity of 90 days or less.

At June 30, 2013, cash was held in three accounts maintained at one financial institution with an aggregate balance of approximately $359,000. Bank accounts are federally insured up to $250,000 by the FDIC. At June 30, 2013, the total cash balance was as follows:

At June 30, 2013
 
Balance
 
Total bank balance
 
$
359,000
 
FDIC insured
   
(250,000
)
Uninsured amount
 
$
109,000
 

The Partnership believes it mitigates the risk of holding uninsured deposits by depositing funds with more than one institution and by only depositing funds with major financial institutions. The Partnership deposits its funds with two institutions that are Moody's Aaa-and Aa3 Rated. The Partnership has not experienced any losses in such accounts, and believes it is not exposed to any significant credit risk. The amounts in such accounts will fluctuate throughout 2013 due to many factors, including cash receipts, equipment acquisitions, interest rates and distributions to investors.

The Partnership’s investment strategy of acquiring equipment and generally leasing it under triple-net leases to operators who generally meet specified financial standards minimizes our operating expenses. As of June 30, 2013, the Partnership had future minimum rentals on non-cancelable operating leases of approximately $1,598,000 for the balance of the year ending December 31, 2013 and approximately $2,334,000 thereafter.

During June 2013, CCC, on behalf of the Partnership, negotiated a settlement with a significant lessee related to the buy-out of several operating and finance leases. The Partnership received consideration of approximately $386,000 as a result of the settlement. This consideration is recorded as a receivable from CCC in the Partnership’s condensed balance sheet at June 30, 2013. The consideration was paid in full by CCC to the Partnership in August 2013.

As of June 30, 2013, our non-recourse debt was approximately $182,000 with interest rates ranging from 4.23% to 5.25% and will be payable through September 2015.

RESULTS OF OPERATIONS

Three months ended June 30, 2013 compared to three months ended June 30, 2012

Lease Revenue

Our lease revenue decreased to approximately $1,001,000 for the three months ended June 30, 2013, from approximately $1,689,000 for the three months ended June 30, 2012. This decrease was primarily due to fewer acquisitions of new leases during the three months ended June 30, 2013 compared to the termination of leases.

The Partnership had 117 active operating leases that generated lease revenue of approximately $1,001,000 for the three months ended June 30, 2013. The Partnership had 291 active operating leases that generated lease revenue of approximately $1,689,000 for the three months ended June 30, 2012. Lease volume decreased during the three months ended June 30, 2013 and 2012 due to the buy-out of operating leases as discussed in Note 3 to the condensed financial statements, partially offset by additions of new leases into the Partnership. Management expects to continue to add new leases to the Partnership’s portfolio throughout 2013, primarily through debt financing.

Sale of Finance Leases

For the three months ended June 30, 2013, the Partnership sold its investments in finance leases for a net gain of approximately $1,000. This net gain on the sale of finance leases is primarily due to the buy-out reached with the significant lessee as described in Note 3 of our condensed financial statements. For the three months ended June 30, 2012, the Partnership did not sell any finance leases.

Sale of Equipment

We sold equipment, held under operating leases, with a net book value of approximately $183,000 for a net loss of approximately $101,000 for the three months ended June 30, 2013. This compares to the three months ended June 30, 2012, when we sold equipment, held under operating leases, with a net book value of approximately $229,000 for a net gain of approximately $25,000. The increase in net loss is primarily due to the buy-out as described in Note 3 of the condensed financial statements.

Operating Expenses

Our operating expenses, excluding depreciation, primarily consist of accounting and legal fees, outside service fees and reimbursement of expenses to CCC for administration and operation of the Partnership. These expenses decreased to approximately $220,000 for the three months ended June 30, 2013, from approximately $302,000 for the three months ended June 30, 2012. This decrease is primarily attributable to decreases in administrative, office, and storage expenses.

Equipment Management Fees

We pay an equipment management fee to our general partner for managing our equipment portfolio. The equipment management fee is approximately 5% of the gross lease revenue attributable to equipment that is subject to operating leases and approximately 2% of the gross lease revenue attributable to equipment that is subject to direct financing leases. The equipment management fee decreased to approximately $50,000 for the three months ended June 30, 2013 from approximately $85,000 for the three months ended June 30, 2012, which is consistent with the decrease in lease revenue.

Depreciation and Amortization Expense

Depreciation and amortization expenses consist of depreciation on equipment and amortization of equipment acquisition fees. These expenses decreased to approximately $1,002,000 for the three months ended June 30, 2013, from approximately $1,374,000 for the three months ended June 30, 2012. This decrease was due to the higher frequency in the termination of leases and equipment being fully depreciated as compared to the acquisition of new leases for the three months ended June 30, 2013.

Net Income (Loss)

For the three months ended June 30, 2013, we recognized revenue of approximately $1,003,000 and expenses of approximately $1,376,000, resulting in a net loss of approximately $373,000. For the three months ended June 30, 2012, we recognized revenue of approximately $1,719,000 and expenses of approximately $1,788,000, resulting in a net loss of approximately $69,000. This change in net loss is due to the changes in revenue and expenses as described above.
 
10
 
 
 

 

Six months ended June 30, 2013 compared to six months ended June 30, 2012

Lease Revenue

Our lease revenue decreased to approximately $2,341,000 for the six months ended June 30, 2013, from approximately $3,434,000 for the six months ended June 30, 2012. This decrease was primarily due to fewer acquisitions of new leases during the six months ended June 30, 2013 compared to the termination of leases.

The Partnership had 117 active operating leases that generated lease revenue of approximately $2,341,000 for the six months ended June 30, 2013. The Partnership had 291 active operating leases that generated lease revenue of approximately $3,434,000 for the six months ended June 30, 2012. Lease volume decreased during the three months ended June 30, 2013 and 2012 due to the buy-out of operating leases as discussed in Note 3 to the condensed financial statements, partially offset by additions of new leases into the Partnership. Management expects to continue to add new leases to the Partnership’s portfolio throughout 2013, primarily through debt financing.

Sale of Finance Leases

For the six months ended June 30, 2013, the Partnership sold its investments in finance leases for a net gain of approximately $1,000. This net gain on the sale of finance leases is primarily due to the buy-out reached with the significant lessee as described in Note 3 of our condensed financial statements. For the six months ended June 30, 2012, the Partnership did not sell any finance leases.

Sale of Equipment

We sold equipment, held under operating leases, with a net book value of approximately $189,000 for a net loss of approximately $79,000 for the six months ended June 30, 2013. This compares to the six months ended June 30, 2012, when we sold equipment, held under operating leases, with a net book value of approximately $291,000 for a net gain of approximately $39,000. The increase in net loss is primarily due to the buy-out as described in Note 3 of the condensed financial statements.

Operating Expenses

Our operating expenses, excluding depreciation, primarily consist of accounting and legal fees, outside service fees and reimbursement of expenses to CCC for administration and operation of the Partnership. These expenses decreased to approximately $519,000 for the six months ended June 30, 2013, from approximately $624,000 for the six months ended June 30, 2012. This decrease is primarily attributable to decreases in administrative, office, and storage expenses.

Equipment Management Fees

We pay an equipment management fee to our general partner for managing our equipment portfolio. The equipment management fee is approximately 5% of the gross lease revenue attributable to equipment that is subject to operating leases and approximately 2% of the gross lease revenue attributable to equipment that is subject to direct financing leases. The equipment management fee decreased to approximately $118,000 for the six months ended June 30, 2013 from approximately $173,000 for the six months ended June 30, 2012, which is consistent with the decrease in lease revenue.

Depreciation and Amortization Expense

Depreciation and amortization expenses consist of depreciation on equipment and amortization of equipment acquisition fees. These expenses decreased to approximately $2,140,000 for the six months ended June 30, 2013, from approximately $2,784,000 for the six months ended June 30, 2012. This decrease was due to the higher frequency in the termination of leases and equipment being fully depreciated as compared to the acquisition of new leases for the six months ended June 30, 2013.

Net Income (Loss)

For the six months ended June 30, 2013, we recognized revenue of approximately $2,357,000 and expenses of approximately $2,861,000, resulting in a net loss of approximately $504,000. For the six months ended June 30, 2012, we recognized revenue of approximately $3,482,000 and expenses of approximately $3,645,000, resulting in a net loss of approximately $163,000. This change in net loss is due to the changes in revenue and expenses as described above.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

N/A

Item 4. Controls and Procedures

Our management, under the supervision and with the participation of the General Partner’s Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures related to our reporting and disclosure obligations as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the General Partner’s Chief Executive Officer and Principal Financial Officer have concluded that, as of June 30, 2013, our disclosure controls and procedures are effective in ensuring that information relating to us which is required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934 is (a) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b) accumulated and communicated to management, including the General Partner’s Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There were no changes in the Partnership’s internal control over financial reporting during the second quarter of 2013 that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.

Part II: OTHER INFORMATION

Item 1. Legal Proceedings

Allied Health Care Services

As previously disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2012, management had fully impaired all equipment and reserved for all accounts receivable related to the lease to Allied Health Care Services, Inc. (“Allied”), due to the bankruptcy of Allied and the criminal conviction of its founder for fraud. During 2013, the fully reserved accounts receivable was written off. There have been no material changes in the status of Allied’s bankruptcy or in the likelihood of recovering available assets since the date of the Partnership’s annual report. The deadline for the bankruptcy trustee to pursue adversary claims against certain creditors has expired, including extensions. The bankruptcy trustee cannot seek to claim the Partnership's payments received from Allied, therefore the Partnership has no exposure to such potential claims. Commonwealth continues to pursue all of our rights against both Allied and Mr. Schwartz to recover any available assets to the greatest extent possible.

Regulatory Activities

In August 2012 Commonwealth Capital Securities Corp (“CCSC”) and Commonwealth Capital Corp., the parent of CCSC and the General Partner, received communication from the staff of the U.S. Securities and Exchange Commission with respect to the interpretation and application of control person with regards to the limits on reimbursement of certain expenses. The staff had also indicated on their communication that they are not suggesting any egregious intent or violation. As a result of ongoing correspondence and conversation, CCC volunteered to and provided clarifying changes that have been made in disclosures in ongoing registration documents used by funds. While management believes that resolution of these issues with this agency will not result in any adverse financial impact on the Funds, we are involved in discussions with staff members to finalize resolution, but no assurance can be provided until resolution comes to conclusion. On May 3, 2013, the FINRA Department of Enforcement filed a complaint naming CCSC and the owner of the firm, Kimberly Springsteen-Abbott, as respondents. The complaint alleges that Ms. Springsteen-Abbott approved misallocation of certain expenses to the funds. Management believes that the expenses at issue include amounts that were proper and were properly allocated to funds, and expenses that had been allocated in error but were previously adjusted and repaid to the affected funds when they were identified. CCSC and Ms. Springsteen-Abbott deny the allegations and intend to vigorously defend the proceeding. Since the FINRA exam, CCC has instituted additional procedures to avoid any such errors in the future. Management believes that resolution of these issues will not result in any adverse financial impact on the Funds, but no assurance can be provided until resolution comes to conclusion.

Item 1A. Risk Factors
N/A

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
N/A

Item 3. Defaults Upon Senior Securities
N/A

Item 4. Mine Safety Disclosures
N/A

Item 5. Other Information
NONE

Item 6. Exhibits

11
 
 

 


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
COMMONWEALTH INCOME & GROWTH FUND VI
 
BY: COMMONWEALTH INCOME & GROWTH FUND, INC., General Partner
 
August 14, 2013
By: /s/ Kimberly A. Springsteen-Abbott
Date
Kimberly A. Springsteen-Abbott
 
Chief Executive Officer
Commonwealth Income & Growth Fund, Inc.
   
   
August 14, 2013
By: /s/ Lynn A. Franceschina
Date
Lynn A. Franceschina
 
Executive Vice President, Chief Operating Officer

12